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3 Ways Britain's Infrastructure Is Holding Back Growth

We won't see it boost the economy for years.

LONDON -- Modern economies depend upon their infrastructure -- things like roads, sewers, ports, railways, hospitals, telecommunications networks, water pipes, reservoirs, and electricity grids. While much of Britain's infrastructure was privatized in the 1980s, the state still has a vital role to play in building and maintaining the national infrastructure and encouraging others to invest in it.

Infrastructure spending is important because it is one of the most reliable ways to stimulate a sluggish economy. This is due to the "multiplier effect," which causes a much larger increase in total output as this type of spending also stimulates activity in other parts of the economy.

Last November, the director-general of the Confederation of British Industry said that 1 pound of construction spending produces 2.84 pounds' worth of total output and that "this can rise to as high as 10 pounds." The problem is that political factors nowadays increasingly oppose infrastructure investment, thus hampering economic growth in at least three ways.

1. "Yes" to more infrastructure -- but not yetYesterday the government announced that 9.4 billion pounds would be spent upon what the prime minister called "the biggest modernisation of our railways since the Victorian era." But it turns out that only 4.2 billion pounds of this is new money, as the other 5.2 billion pounds represents projects that are already in the works. Also, nothing is going to happen until 2014 at the earliest, so this won't boost the economy for several years.

Britain's biggest proposed railway project, the 33 billion pound High Speed 2 rail link, or HS2, is being delayed by a torrent of planning objections and wrangles over compensation. This isn't a bit surprising, as few people want a new railway line to be built next door, but the extremely well-organized and well-funded objections to new infrastructure projects that we see nowadays impose lengthy delays.

That said, the commercial benefits of HS2 are increasingly being questioned, and in a recent House of Lords debate, Viscount Astor spoke out that the government's own multiplier of 2.4 had recently been reduced to just 1.2, which demolishes the main argument in its favor.

2. "Not in my backyard"For many years, successive British governments have argued in favor of a third runway at Heathrow airport, while those living nearby generally oppose it. The problem is that the economy is going to suffer if the airport capacity in the South East is not increased, as business and tourism will be lost to countries with better airports.

A few days ago the government kicked this decision into the long grass until after the next general election, following yet another decision to put the consultation process on hold. Naturally, the aerospace, airline, and tourism industries are not happy about this, but as is often the case, political considerations trump economics.

The Heathrow expansion was already on a sticky wicket because the locals are well-practiced at fighting further development of Heathrow. The rise of the NIMBY movement -- made up of the "not in my backyard"-chanting people who want to preserve things as they are -- is only natural. And in this instance they've changed the government's mind.

3. Vested interests oppose changeAnother important part of the national infrastructure is the education system, because it provides workers. An interesting story I saw last week was that a proposal to open a free school in Oldham where all of the teachers would be ex-military personnel, a very innovative idea, had been rejected by the local authority.

One of the leaders of this effort said in a BBC radio interview yesterday morning that the Education Authority had objected to the senior staff's lack of state school experience and refused to give them any credit for having worked in independent schools.

To me, this looks like a classic case of producer interests (the educational bureaucracy and teaching unions) defending their turf by stopping a competitor. Increasingly, the education policies of all three main political parties are in favor of giving parents more choice, yet when it comes to implementing these policies, the Civil Service does something else.

How to invest in infrastructureWhen looking to invest in sectors that benefit from infrastructure investment, the obvious winners are the engineering and construction companies that will be working on these projects. This means the usual suspects -- companies such as Balfour Beatty, Carillion, Galliford Try, Kier, and Morgan Sindall Group, as well as building materials specialists like CRH.

This way of investing was popularized by the California gold rush of 1848 to 1855, when the people who made the most money were the ones who were selling the picks and shovels to the prospectors. So while an infrastructure project may or may not eventually boost the economy, the companies involved in the construction will still profit.

Things like the multiplier effect and the impact of infrastructure spending on various sectors of the economy can be puzzling to a novice investor. If you're a beginner, this special report -- "What Every New Investor Needs To Know" -- can start you on the path to investing. What's more, the report is free!

London benefits from the OlympicsLondon's economy should receive a big boost from the infrastructure spending that was needed to host the Olympics, though it may end up with a better return from the media coverage. I've been buying shares in several London property companies this year as a play on both of these theories.

However, the 32-mile traffic jam that appeared on the M4 yesterday shortly after the opening of the special "Zil lanes," which are reserved for Olympic officials and competitors, was not what the economists ordered. Perhaps London needs a few more road-building projects!

One company that's suffered badly because of the Olympic infrastructure spending, albeit indirectly, is security provider G4S(LSE: GFS.L). It should have been a big beneficiary, but the recent announcement that it hasn't been able to hire enough people to fulfill its Olympics security contract has hammered its share price and dented its reputation.

Investing is by no means easy in today's uncertain economy. That's why we've published "Top Sectors for 2012" -- our guide to three favorable industries. This free report will be dispatched immediately to your inbox.